Helping universities and colleges navigate the fossil fuel divestment debate
“The clear and present danger of climate change means we cannot burn our way to prosperity. We already rely too heavily on fossil fuels. We need to find a new, sustainable path to the future we want. We need a clean industrial revolution.”
Taking inspiration from former UN Secretary General Ban Ki-moon’s rallying cry for a “clean industrial revolution” and a more sustainable path to future prosperity, Rathbones hosted an event in London on 8 September 2017 to discuss the challenges facing higher education institutions considering divestment from fossil fuels.
Rathbone Greenbank outlined the background to the issue, after which attendees heard from Robert Kerse, the University of Bristol’s chief financial officer, who gave an insight into the history and development of the university’s plans to reduce its exposure to fossil fuels in its endowment funds.
Matt Crossman, engagement manager at Rathbone Greenbank, opened the debate by summarising the theoretical process of divestment as a response to a variety of social and environmental concerns. In simple terms, a strategy of avoiding investment in fossil fuels can ultimately lead to the target company being deprived of the finance it needs to maintain or accelerate its exploration or production activities. This in turn results in less resource extraction and lower carbon emissions due to reduced consumption.
But, in reality, divestment isn’t a decision that can be taken in isolation. While avoidance may be a default position for more politically motivated investors, full exclusion has implications for the income generation and risk profile of investment portfolios. And it also closes off the most effective avenue for shareholder dialogue – the right to vote on company resolutions and the use of that right to ask for and enforce strategic change.
With this in mind, Rathbone Greenbank regards full exclusion more as the final act in an escalating process of engagement that works upwards from informal dialogue with target companies to meetings with management, direct voting activity and the tabling of resolutions at company AGMs. This process of escalation acknowledges the fact that simple avoidance may not produce the desired effect for investors who want to see greater investment in alternatives to fossil fuels: any reduction in shareholders’ ability to engage may reduce the incentives for companies to answer demands for them to operate more sustainably and invest in clean energy solutions.
Oversimplifying the divestment process also ignores the fact that the vast majority of global oil and gas reserves are owned by national oil companies rather than listed companies, which it primarily targets.
Investors considering a divestment strategy should therefore think in broader terms of scope, scale and span: should the focus be on extraction or the ultimate use of resources? Should engagement activity target current production output or potential reserves? Is this activity driving an immediate divestment action or working to evolve a more gradual transition? Most importantly, are there identifiable industry participants with the kind of transformation strategies that complement investor values and investment goals?
Following Matt’s introduction, Robert Kerse, chief financial officer at the University of Bristol, outlined the reasoning and process behind the university’s own decision to adopt a policy of divestment.
The promotion of a more sustainable future is one of the university’s core values. Social and environmental challenges are researched by the university’s Cabot Institute and its Fossil Free Society has advocated a pro-divestment stance through its own campaigning since 2014. Gauging opinion outside the student body, the university also identified a significant number of stakeholders and key board members willing to support a move towards divestment. In building a case for exiting less sustainable investments and realigning institutional and investment values, the university initially invested 5% of its endowment funds into a sustainability fund.
There were other important considerations to factor into the development of an acceptable divestment policy. For example, around 90% of the university’s endowment funds were established for permanent use with fixed long-term investment objectives for the institution as a whole. Additionally, some departments and research projects work collaboratively with fossil fuel companies, while a diverse range of stakeholder perspectives meant that a full exclusion divestment plan would not have been reflective of the overall balance of opinions, as well as being an ineffective use of future voting rights.
In establishing a flexible, time-managed policy position, the university elected to end investment in companies deriving more than 5% of turnover from the extraction of thermal coal or oil and gas from tar sands by January 2018. It also pledged to actively manage other areas of its established portfolio and seek to invest in companies demonstrating greater commitments to energy efficiency and the development of more sustainable energy resources.
The animated discussion that followed both presentations demonstrated strong overall support for the moral and financial arguments for a flexible, scaled approach to fossil fuel divestment. It also served to highlight the continuing concern among representatives responsible for their institutions’ financial wellbeing that investment reallocation as a result of divestment, or other forms of values-based policy action, needs to be conducted in a way that doesn’t detract from long-term financial goals and other strategic plans.